The last 15 years have been a nightmare for life insurance salespeople. Higher interest rates, driven by the Federal Reserve’s anti-inflationary campaign, have provided the industry with a new opportunity to profit.
However, many of the country’s largest publicly traded insurers will be absent.
Many of these life insurers no longer sell life insurance, at least not to American consumers. When low interest rates hit both their profits and stock prices, they gave up the business and their armies of agents.
“They’ve kind of packed up and gone home, Elvis has left the building,” said Colin Devine, a former Wall Street analyst who now runs an industry consulting firm. Many were reacting to investor pressure for higher returns.
One consequence is that fewer people have life insurance. According to the industry-funded research firm Limra, 52% of American adults own life insurance today, down from 63% in 2011. Many families rely on policies provided by their employers, even though such coverage is frequently insufficient.
MetLife Inc., Hartford Financial Services Group Inc., Jackson Financial Inc., Allstate Corp., Genworth Financial Inc., and Voya Financial Inc. are among the publicly traded insurers that have stopped selling individual life insurance policies to American households entirely or mostly. Individual life insurance policies are only sold by Principal Financial Group to business owners and key employees.
They are passing up some of the highest interest rates since the financial crisis of 2008. It’s a big deal because life insurers make a significant portion of their money by investing premiums until the money is needed to pay claims. Low interest rates, among other things, reduce interest income and profit margins.
The 10-year Treasury yield, which insurers closely monitor, was above 4% earlier this year and on track to rise further, though the recent bond-market rally drove it back down to around 3.4%. From the 2008 financial crisis to last year, the 10-year Treasury yielded less than 3%, and it will yield less than 1% for much of 2020.
According to ratings firm AM Best, the average net yield of life and health insurers’ investment portfolios fell to an estimated 3.92% last year, down from 5.92% in 2007.
Mutually owned insurers such as Northwestern Mutual Life Insurance Co., New York Life Insurance Co., and Massachusetts Mutual Life Insurance Co. have emerged as winners. Because they are owned by their policyholders, they are not subject to Wall Street’s quarterly earnings pressure, and they have more flexibility in profit-margin goals because they can take a long-term view. They also kept their agents, who sit at kitchen tables and give consumers the confidence to buy a product that is typically sold rather than bought.
Some publicly traded insurers, such as Manulife Financial Corp.’s John Hancock unit, Lincoln National Corp., Primerica Inc., and Prudential Financial Inc., continue to be significant issuers of individual-life policies.
As insurers exited or reduced their presence, market share shifted. According to AM Best, premium volume for individual-life policies for publicly traded and other for-profit, non-mutual companies fell 22% between 2007 and 2022, to $83.32 billion. At the same time, mutual volume more than doubled to $77.9 billion. Volume was up 14% overall.
Allstate CEO Tom Wilson stated in an interview that the company exited its life insurance and annuities businesses in recent years because the returns to shareholders had become unacceptably low. He stated that the decision came down to “do we want to keep our money in this?”
Allstate sold virtually all of its operations in 2021, incurring a $4 billion loss. This was primarily due to a decline in the value of its annuity business. Allstate was a rare property-casualty insurance stock to rise the day after the announcement.
Mr. Wilson stated, “I would do it again” today. “While current rates have increased,” he said, “longer-term expectations for interest rates are unclear,” and “economic and financial-market volatility and conditions are more uncertain today.” In the 2021 agreement, Allstate has a “earn out” provision that allows it to benefit from 10-year Treasury rate increases over a 10-year period.
Many public companies have reorganized to focus on employee benefits, pension-plan services, asset management, and international expansion. Term life insurance is one of the group benefits. Insurers like this product because premium rates can be renegotiated every year or so. In contrast, insurers have limited ability to raise rates on life insurance policies after they have been sold to individuals.
“There’s no other business like it, where you set a price today on a product that will last 20 years, 30 years, 40 years, or longer,” said Mr. Devine, the consultant.
During the low-rate years, life insurance companies’ total shareholder return lagged behind the broader market. Despite the fact that companies returned a greater share of capital through dividends and buybacks between 2012 and 2021 than other financial-services sectors, according to research by consulting firm Oliver Wyman.
Investors have yet to reward insurers who have remained in the life insurance business. Since the Fed began raising interest rates in March 2022, insurers that have largely or completely exited U.S. individual-life sales have outperformed many of those that have remained.
The period of ultralow interest rates “was definitely tough,” according to Andrew Kligerman, a Credit Suisse stock analyst. “It’s almost as if the companies shouldn’t be called life-insurance companies anymore,” he said of those that went bankrupt.
Life insurers faced mounting challenges even before interest rates fell. Mutual funds, 401(k)s, and low-cost term-life policies grew in popularity as alternatives to whole-life policies, which combine a tax-advantaged savings compartment with a tax-free death benefit and have long been a cornerstone of household finances.
Selling multimillion-dollar policies to the wealthy to avoid taxes became more difficult as fewer people were affected by estate taxes. In 2000, the federal estate-tax exemption was $1 million per spouse; this year, it is nearly $13 million.
According to some consultants and analysts, interest rates will have to rise to around 5% to entice the big public companies to sell life insurance again.